We believe oil prices are likely to stay elevated throughout 2022-2023, underpinned by the resurgence of China’s demand to drive global demand, while increased Russian sanctions coupled with OPEC+’s capacity constraints may lead to supply being insufficient to keep pace. Overall, we are maintaining our 2022-2023 Brent crude oil price assumption of USD100- 110/barrel. Petronas had revised its annual capex guidance upwards to RM60b (from RM40- 50b previously) – almost doubled YoY from RM30.5b in 2021, in preparation for the resumption of activities. With 1QCY22 capex still largely underwhelming, we are convinced that capex spending will be backloaded into the coming quarters – hence, translating to a resurgence of local activity levels. Petronas’ net-cash position is currently at a 3-year high of RM90.6b, with dividend commitments remaining flat at RM25b despite the better earnings outlook. Hence, we see little obstacles in Petronas meeting its own capex guidance. Globally, offshore E&P capex is also expected to pick up in the coming years as an aftermath of under-investments over the past several years and may even surpass pre-Covid levels. Given the largely lagged earnings effect of the locally listed oil and gas players (which is mostly dominated by local-centric equipment and service providers), we have yet to see any meaningful or sustainable rally within the sector, except for those with high earnings correlation to oil prices (e.g. PCHEM, HIBISCS). The KL Energy Index is still trading at a forward PER valuation close to its trough seen during the peak lockdowns in 1HCY20. We believe this signals some selective laggard opportunities within the sector. Maintain OVERWEIGHT on the sector, with stock picks to include: (i) PCHEM – as a prime beneficiary of the continued elevated oil prices, and (ii) DAYANG – a play on the recovery of local activity levels.

Oil prices expected to stay elevated. We believe oil prices are likely to stay elevated throughout 2022-2023. While a weaker economic outlook may suggest moderating consumption, this is expected to be more than offset by the resurgence of China’s demand to drive global oil demand. Meanwhile, global oil supply may continue to struggle to keep pace with the higher demand as tighter sanctions forced Russia to shut in more wells. The EU countries have agreed to ban 90% of the bloc’s imports of Russian crude and oil products, to be phased out over the next 6-8 months. Note that prior to this, Russia accounts for ~10% of global oil supply, and ~40% of Europe’s gas supply. Additionally, while the modest upward adjustment in OPEC+’s planned production numbers may provide a near-term relief, these are still likely insufficient to offset the growth in demand and supply constraints going into the next couple of months. Overall, we maintain our 2022-2023 Brent crude price assumption of USD100-110/barrel.

Source: Kenanga Research - 22 Jul 2022